Regal Entertainment, Cinemark Upgraded By Morgan Stanley; Concerns Of Disappointing Summer Box Office Overdone

Analysts at Morgan Stanley turned less bearish on two movie theater chain names amid a view that competition from streaming video platforms and a disappointing summer box office are overdone and already priced into the stock.

Morgan Stanley's Benjamin Swinburne upgraded Regal Entertainment RGC from Underweight to Equal-Weight, with a price target lowered from $21 to $17. The analyst also upgraded Cinemark Holdings CNK from Underweight to Equal-Weight, also with a price target lowered from $40 to $38.

There's no doubt that summer 2017 was a "cruel" period for the movie industry, Swinburne commented in the note. In fact, a strong start to 2017 was followed by the disappointing summer months but expectations for the fourth quarter are strong enough for the industry to end 2017 flat against 2016.

The strong success of the horror movie "It" should serve as proof that demand for "strong" and "compelling" films still exists, the analyst said. As such, a compelling lineup of movies for 2018 should turn investors to become "cautiously optimistic" on the industry.

Moving on to threats from online video streaming players, it's "very difficult" to quantify the size of the risk given ongoing uncertainties related to studio participation, windowing, and pricing. At the very least, the risk is merely an "overhang which could impact multiples" and the worst-case scenario could result in an 8 percent drop in attendance by year.

It's still likely there will be "little to no cannibalization of moviegoing from early window releases."

Regal and Cinemark's stocks offer attractive dividend premiums versus treasuries, which should add some downside support moving forward.

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